Press Release

DBRS Morningstar Assigns Rating of A (sf) with a Negative Trend to European Residential Loan Securitisation 2020-NPL1 DAC

Nonperforming Loans

November 23, 2020

DBRS Ratings Limited (DBRS Morningstar) assigned an A (sf) rating with a Negative trend to the EUR 153,500,000 Class A notes issued by European Residential Loan Securitisation 2020-NPL1 DAC (the Issuer).

The transaction represents the issuance of Class A, Class P, and Class Z notes. The rating of the Class A notes addresses the timely payment of interest and ultimate payment of principal on or before the final legal maturity date (24 January 2060). DBRS Morningstar does not rate the Class Z or Class P notes.

Proceeds from the issuance of the Class A to Class Z notes will be used to purchase a first-charge nonperforming Irish residential mortgage loan portfolio originated by Permanent TSB p.l.c. (PTSB) that had a total outstanding balance of EUR 381.8 million as of 30 September 2020. Nonperforming loans (NPLs) represent the majority of the portfolio by outstanding balance (95.1%). The acquisition of the pool by Start and LSF XI Glas II Investments DAC completed on 7 February 2020. Servicing of the mortgage loans is conducted by Start Mortgages DAC (Start), which is also expected to continue as administrator of the assets for the transaction. Hudson Advisors Ireland DAC (Hudson) will be appointed as the issuer administration consultant and, as such, will act in an oversight and monitoring capacity and provides input on asset resolution strategies.

The transaction benefits from a reserve fund to support liquidity shortfalls on interest due in relation to the Class A notes and, ultimately, the repayment of principal on the same, if available. The Class A reserve fund will be fully funded at closing to an amount equal to 5.5% of the Class A notes initial balance. The reserve amortises over time to a target amount equal to the greater of (1) 5.5% of the outstanding balance of the Class A notes and (2) 0.25% of the initial balance of the Class A notes; it will be replenished to the required amount up to the earlier of (1) the interest payment date (IPD) when the Class A notes are redeemed in full and (2) the IPD on which the outstanding principal balance of the mortgage loans becomes less than 1.0% of their initial principal balance as of closing.

Starting from and including the IPD falling in November 2023 (Additional Note Payment Date), additional note payments (Additional Note Payments) accrue in respect of the Class A notes, and they can be paid on and from the IPD immediately following the Additional Note Payment Date. The payment of any Additional Note Payments is subordinated to the paydown of interest and principal on the Class A notes and their payment cannot be covered via the Class A reserve funds. The paydown of the Additional Note Payments can be deferred and their nonpayment does not constitute an event of default. DBRS Morningstar does not rate the payment of Additional Note Payments.

The Issuer has entered into an interest rate cap agreement with Nomura International plc that will terminate in November 2025. On the termination date of the cap agreement, the coupon cap rate on the Class A notes becomes applicable. The Issuer will pay the interest rate cap fees in full on the closing date and in return receive payments to the extent that the one-month Euribor rate is above 0% for the first three years and above 0.5% for a further two years. The Issuer can unwind or sell part of the interest rate cap at the mark-to-market position provided that the notional amount of the interest rate cap does not fall below the outstanding balance of the Class A notes.

The Issuer may sell part of the portfolio subject to sale covenants. The sale price must be at least 75% of the aggregate current balance of the mortgage loans that are subject to a sale. The Class P notes may get principal repayment earlier than upon redemption of the Class A notes, in the event of a portfolio sale. Payments made to the Class P notes are capped at the initial balance of the Class P notes. Following full repayment of the Class P notes, any amount otherwise due to be paid to the Class P notes will be applied as available funds.

Elavon Financial Services DAC (Elavon) will act as the account bank for this transaction. DBRS Morningstar privately rates Elavon and has concluded that it meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade provisions relating to the transaction account bank where, if downgraded below BBB (low), the Issuer will have to replace the account bank. The downgrade provision is consistent with DBRS Morningstar’s criteria for the rating of A (sf) with a Negative trend assigned to the Class A notes. The interest rate received on cash held in the account bank is not subject to a floor of 0%, which can create a potential liability for the Issuer. DBRS Morningstar has assessed potential negative interest rates on the account in its cash flow analysis.

RATING RATIONALE
DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collections and resolution activities. DBRS Morningstar estimated the expected collections from the mortgage loans based on the proposed business plan and resolution strategies and used them as an input into the cash flow analysis. The mortgage portfolio was analysed in accordance with DBRS Morningstar’s “Rating European Non-Performing Loan Securitisations” methodology.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A notes according to the terms of the transaction documents.
-- The sovereign rating of the Republic of Ireland, which DBRS Morningstar rates A (high), R-1 (middle) with Stable trends as of the date of this press release.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp economic contraction, increases in unemployment rates and reduced investment activities. DBRS Morningstar anticipates that collections in European NPL securitisations will continue to be disrupted in coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of COVID-19. For this transaction, DBRS Morningstar assumed reduced collections for the next two quarters and incorporated its revised expectation of a moderate medium-term decline in residential property prices.

On 16 April 2020, the DBRS Morningstar Sovereign Group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/366543/dbrs-morningstar-global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information on DBRS Morningstar considerations for European NPL transactions and COVID-19, please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393.

For more information regarding rating methodologies and COVID-19, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and COVID-19, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating European Non-Performing Loans Securitisations” (13 May 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include a loan data tape as of 30 September 2020, historical performance from March 2015 to September 2020, historical sales data covering from 2014 to date, and the portfolio business plan. The sources of information used for these ratings were PTSB and Start via Hudson and the arrangers.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The ratings were disclosed to the arrangers and amended following that disclosure before being assigned.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the ratings (the Base Case):

-- The expected principal and interest collections in a rising, flat and decreasing interest rate scenario at the A (sf) rating level, a 5% and 10% reduction in the expected collections.

-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (sf).
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Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.

Lead Analyst: Laura Lombardo, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 November 2020

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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